The overall economy continued to grow for the 43rd consecutive month while economic activity in the manufacturing sector expanded, moving the Purchasing Managers Index (PMI) back over the 50 percent mark in December, according to the latest Manufacturing ISM Report On Business.

“The Institute for Supply Management (ISM) Index was 50.7 in December, up from 49.5 in November,” noted Daniel J. Meckstroth, Chief Economist for the Manufacturers Alliance for Productivity and Innovation (MAPI). “Since an index level of 50 is the dividing line between growth and decline, the report on December manufacturing suggests that the sector’s activity fell in November but rose in December. Unfortunately, the up-and-down pattern in manufacturing has been a characteristic of manufacturing activity since May 2012. It is disappointing that the orders index posted very little growth in both November and December and that order backlogs continue to decline. Inventory levels are being drawn down sharply following an unwanted accumulation in the third quarter.”

The PMI registered 50.7 percent, an increase of 1.2 percentage points from November’s reading of 49.5 percent, indicating expansion in manufacturing for only the third time in the last seven months. This month’s PMIreading moved manufacturing off its low point for 2012 in November.

Imports And Exports

Both the Exports and Imports Indexes registered 51.5 percent, returning both indexes to growth territory following consecutive periods of contraction of six and four months, respectively. ISM’s Imports Index was 3.5 percentage points higher than the 48 percent reported in November while the New Export Orders Index registered 4.5 percentage points higher than the 47 percent reported in November.

“The fact that they were down for four and six months was rather disconcerting and obviously a reflection of a soft global economy,” explains Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management Manufacturing Business Survey Committee. “I don't think we should look at just this one spike to glean what's coming up for the next few months. Hopefully it remains on the positive side and not just a spike, but that remains to be seen.”

Orders And Production

ISM’s New Orders Index registered 50.3 percent in December, the same rate as reported in November. This represents the fourth consecutive month of growth or steadiness in new orders, following three consecutive months of contraction. A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau’s series on manufacturing orders (in constant 2000 dollars).

ISM’s Backlog of Orders Index registered 48.5 percent in December, which is 7.5 percentage points higher than the 41 percent reported in November. This is the ninth consecutive month of contraction in order backlogs. Of the 86 percent of respondents who reported their backlog of orders, 22 percent reported greater backlogs, 25 percent reported smaller backlogs, and 53 percent reported no change from November.

“New orders have kind of gone sideways and are essentially flat from last month but nonetheless positive,” says Holcomb. “I think when you couple that with the backlog of orders jumping 7.5 percentage points, which says that backlog orders are increasing considerably, which is sort of a safety net for production. “

ISM’s Production Index registered 52.6 percent in December, which is a decrease of 1.1 percentage points when compared to the 53.7 percent reported in November. This indicates growth in production for the third month following two consecutive months of contraction. An index above 51.2 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.

Employment

The Employment Index registered 52.7 percent, an increase of 4.3 percentage points, indicating a resumption of growth in employment following only one month of contraction since September 2009. An Employment Index above 50.5 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.

“I would guess at least half of employment increase is additional seasonal holiday hiring and yet it's only been below 50 one time in the last 39 months,” adds Holcomb. “It's a really good sign that it has kind of hung in there for us. While it’s a good sentiment for hiring people, it won't translate into huge employment numbers since the manufacturing sector only represents about 12 percent of GDP these days.”

Moving Forward

With things looking up in December, there are still unanswered questions concerning the manufacturing sector that will have to be answered to move forward. Will Europe pull out of its recessionary mode? Will China get back on track? What is the impact of the fiscal cliff deal?

“We do not expect another manufacturing production surge in first quarter of 2013,” Meckstroth concluded. “We do see strong growth in the housing-related industries, aerospace, and automobile production in 2013 but there are many other industries within manufacturing which should see little, if any, growth. MAPI forecasts manufacturing industrial production will increase only 2 percent in 2013. Although the growth will be less in 2013 than in 2014, manufacturers may feel better with a less volatile quarter-to-quarter pattern.”

Holcomb is a bit more optimistic about 2013 and feels the stronger end to 2012 has set up the U.S. manufacturing sector for a better new year.

“Personally I'm optimistic about good moderate growth over the next few months and hopefully it will lead to an even better second half of 2013,” adds Holcomb. “Ending the year over 50 is really good news and the underlying indicators are all supporting that. I see it as a great way to end the books on 2012 and we have a good jumping off point for a better 2013.”

In his role as the Chair of the Institute for Supply Management Manufacturing Business Survey Committee, Bradley J. Holcomb writes the monthly Manufacturing ISM Report on Business based on the survey results of approximately 350 professionals across 18 different industry sectors. The Report on Business is released on the first business day of each month, and features the PMI Index as its key measure. For more information on the Institute of Supply Management, visit www.ism.ws.